SOCIAL CONSTRUCTION OF FINANCIAL REPORTING PRACTICE IN AN INDONESIAN INSURANCE COMPANY: JAVANESE CULTURE PERSPECTIVE

Anis ChaririFakultas Ekonomi

Universitas Diponegoro, Semarang, Indonesia

ABSTRACT

This study is a case study conducted in an Indonesian insurance company. The aim of the study is to understand the dynamics of financial reporting in the company. Ontologically, this study is built on a belief that financial reporting practice is a socially constructed reality. As a socially constructed reality, such a practice involves an interaction among social actors, and between organisational actors and the institutional and cultural environment in which the company operates. The main research question of this study is how organisational culture influences the company on the construction of its financial reporting practice. This study reveals that the company is committed to quality financial reporting because such reporting can be used to gain legitimacy and to maintain social harmony. The company conducts itself in this way is because it reflects Javanese culture, a dominant culture in Indonesia. Furthermore, this study concludes that the way the actors in the company construct financial reporting practice is influenced by its organisational culture. The organisational culture of the company, which reflects Javanese culture, is able to shape the behaviour of its actors from the top level to lower levels to conduct ethical and transparent business practice. Thus, as Hines (1988) claims, this paper concludes that financial reporting practice is a socially constucted reality.

Key words: organisational culture, Javanese culture, financial reporting, social construction

INTRODUCTION

This study claims that ontologically, financial reporting is a socially constructed reality

that can shape, and be shaped by powerful actors and institutional environments. As a socially

constructed reality, organisational actors can construct financial reporting so as to gain

legitimacy and show that their organisation operates in accordance with socially acceptable

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beliefs, values and norms. Hurst (1970) argues that one of the functions of accounting,

including corporate financial reports, is to legitimate the existence of the corporation. The role

of corporate financial reporting is to inform a society that an organisation’s actions are

accountable, and that they conform to social values and norms.

This study is based on the understanding that reality exists as a social product and as a

result of human interaction, symbolic discourse and creativity (Burrel and Morgan 1979;

Denzin 1983; Hopper and Powell 1985; Morgan 1980; 1988; Tomkin and Groves 1983).

Furthermore, it assumes that humans are incapable of total objectivity because they are

situated in a reality constructed by subjective experience (Berger and Luckmann 1984).

Meanings and the search for the truth is possible only through social interactions (Streubert

and Carpenter 1999). The inability quantitatively to measure some phenomena has led to

intense interest in using other approaches to particularly human phenomena (Nahapiet 1988).

Consequently, this study was designed with an interpretive method of inquiry.

This study used PT. Asuransi Bintang, Tbk (hereafter Bintang)—a publicly listed

company, which was the recipient of annual report awards since 1980. The reason for using the

company as a research setting is that Bintang has been able to show itself as a transparent and

accountable company. Annual report awards received by the company since the 1980s are

evidence that the company is an example of one who practises good financial reporting

practice in Indonesia, especially in the insurance industry. Finally, the reason Bintang was

chosen as the research setting was that it has a unique culture influenced by the Javanese views

on an ethical social relationship. In particular, this study aims to seek an answer to the

following specific question: “how organisational culture influences the company on the

construction of its financial reporting practice.

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JAVANESE CULTURE

Discussing Javanese culture is not easy, because it is so diverse and complex. Such a

discussion could refer to language, way of life, ethics, performing arts, texts and more. This

study focuses on the Javanese culture in terms of world-view, “the Javanese idea of the good

life” as studied by Magnis-Suseno (1997). Because of the sheer size of the community, the

homogeneity of its culture and their influence on the nation’s capital, Javanese culture

influences the way of life of most Indonesians, and the Javanese dominate cultural, business,

social and political activities in Indonesia (Mann 1996; Magnis-Suseno 1997).

The Javanese have a complex code of etiquette and respect, reflected in the Javanese

language. However, the maintenance of inner peace and harmony is a priority in social

relationships among the Javanese. Indeed, maintenance of social harmony is the core value of

Javanese culture (Magnis-Suseno 1997). The social relationship of the Javanese is

characterised by two basic principles reflecting their ideas of a good life: conflict avoidance

and respect.

Javanese culture is characterised by the avoidance of all form of direct confrontation.

Indeed, conflict avoidance plays a crucial role in maintaining social harmony. To avoid

conflict, the Javanese are committed to the concept called as “rukun”, which shows how

people should interact in a social relationship. Mulder (1978, p. 39) has described rukun as

follows:

Rukun is soothing over of differences, cooperation, mutual acceptance, quietness of heart, and harmonious existence. The whole of society should be characterized by the spirit of rukun, but whereas its behavioural expression in relation to the supernatural and to superiors is respectful, polite, obedient, and distant, its expression in the community and among one’s peers should be ‘akrab’ (intimate) as in a family, cozy, and ‘kangen’ (full of the feelings of belonging).

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Rukun is characterised by cooperation, mutual acceptance, calm and unity (Magnis-

Suseno 1997). To achieve rukun, individuals should be a part of the group and their

individuality should be expressed through the group. Hence, all obvious expression of conflict

that lead to disharmony should be avoided.

Another way to maintain social harmony is the implementation of the principle of

respect. According to this principle, the Javanese, both in speech and behaviour, have to

demonstrate “proper respect to those with whom one comes into social contact” (Magnis-

Suseno 1997, p. 62). Similar to the principle of conflict avoidance, the use of language and

gesture reflects how the Javanese extend their respect to other people in accordance with their

social status (such as age and structural positions). Hence, individuals should know their

positions and duties, and honour and respect those in higher positions, while remaining

benevolent towards, and responsible for those in lower positions (Magnis-Suseno 1997).

It is also important to note that a social relationship, there is almost no room for

individualism in the Javanese society. In other words, in spite of being individuals, the

Javanese prefer collectivism. This view is based on a belief that social harmony can be

threatened by individualism, diversity and conflict (Mulder 1994). As far as collectivism is

concerned, it is common for the Javanese to “develop networks of acquaintance: workmates,

customers, relatives, friends, neighbors and colleagues” (Yudianti and Goodfellow 1997, p.

104).

To exercise collectivism, individuals act both in social and in business activities based

on the concept of “gotong royong” and “musyawarah”. “Gotong royong” refers to a

philosophy that says that people must help each other; whereas “musyawarah” refers to the

fact that all decisions should be made only after a consensus or compromise has emerged

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(Magnis-Suseno 1997). The demand for collectivism that is supported by “gotong royong” and

“musyawarah” is codified in a classical and well-known Javanese proverb: “Sepi ing pamrih,

rame ing gawe, mangayu ayuning bawana—be disinterested, work hard, perfect the world”

(Antlov 1994, p. 77).

ORGANISATIONAL CULTURE OF BINTANG: A CIRCUIT OF ETHICAL CONDUCT

In regard to how Bintang builds its organisational culture, it can be seen that the words

transparency, public accountability, conservatism and ethical business become discourses in

Bintang. Those who join Bintang will directly experience and are involved in a conversation

concerning these words. Any time and any place at which interaction among employees and

between employees and top management takes place the words will be mentioned. This can be

interpreted that such words are perceived to be taken-for-granted beliefs and values within this

company.

The core values of the company consist of commitment, positive thinking, credibility,

acceptance and carrying out of responsibility, prudence in all business decisions, teamwork,

understanding and enjoying business ethics, high customer services and innovations. The

employees of Bintang believe that the core values of Bintang are built based on the internal

environment, which refers to the daily behaviours of organisational members since the

establishment of the company. These core values are then symbolised in the word “MAJU”

(meaning “move forward and become superior”), and they cannot be separated from the

principle of accountability. To understand this further, it is helpful to note that by describing

corporate values, codes of conduct invite and require an accountability of organisational

members to these values (Willmott 1998).

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To realise its business philosophy and management of organisational culture, all

individuals should act ethically according to the governing regulations and other informal

rules. Consequently, the employees of Bintang run the insurance business by obeying all rules

and regulations and complying with socially imposed norms for maintaining social harmony.

This principle has been accepted as a taken-for-granted belief that guides organisational actors

in their daily organisational life.

Source: adapted from Schein (2004)

Using the culture paradigm discussed by Schein (2004), the relationship of business

philosophy, core values and conservatism can be illustrated as a circuit of organisational

culture showing an integrated-ethical value chain that guides organisational actors in

conducting business activities (see Figure 1). Considering the circuit of organisational culture

of Bintang, it can be seen that such a culture reflects Javanese culture, the Javanese idea of an

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Positive ThinkingCommitment

Acceptance and Carrying out Responsibility

Credibility

BASIC PRINCIPLES:

Public Accountability

Conservatism

High Customer ServiceInnovation

Prudent in Decision MakingTeamworkBusiness Ethics

Figure 1 The Circuit of Organisational Culture of Bintang

ethical social relationship. This is consistent with a claim by Maclagan (1998, p. 145), who

supports institutional theory, in that

...to survive in the progressively more ‘turbulent’ social environments, which [are] becoming the norm, organisations would need to adopt and act according to the values that would align them with the expectations of society.

The basic principle of public accountability is identical with the maintenance of social

harmony. In this regard, employees of Bintang should be publicly accountable and act in

accordance with socially imposed values and norms. According to Branscomb (1995),

accountability implies acceptance of responsibility, without which there is no basis on which

an injured party can initiate a tort action to redress grievances. Furthermore, public

accountability can also be seen as a set of social relations. This is because accountability is a

socially constructed reality referring to something that is sensible and meaningful.

Referring to Willmott’s (1996) work, the construction of such a sensible and

meaningful world involves people that lead to the practice of accepted accountability.

Moreover, Pollit (2003) and Romzek and Dubnick (1998) argue that public accountability

refers to a social relationship in which an actor feels an obligation to explain publicly and

justify their conduct to various significant people. These arguments support a claim that public

accountability used by Bintang, as a business philosophy, reflects the core value of Javanese

culture, the maintenance of social harmony.

Conservatism, in the language used by the people of Bintang, means total obedience to

any governing regulations and compliance with socially imposed values. This view is

consistent with Tannsjo (1990, p. 10), who contends that “...conservative attitude is the attitude

of one disposed to preserve well-established existing institutions because they exist”. By being

conservative, Bintang wants to respect regulators and any socially acceptable values and avoid

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a conflict with regulators and the community. Consequently, it can be inferred that this concept

reflects the principles of conflict avoidance and respect.

In addition, the case of Bintang signifies that organisational culture is not embedded

naturally in an organisation. Instead, it is transmitted deliberately into an organisation.

Organisational culture is not a static phenomenon. Schein (1995, pp. 225–226) argues that the

basic process of embedding and transmitting a cultural element is a “teaching process” through

the use of a number of mechanisms, such as

…formal statements of organizational philosophy, charters, creeds, material used for recruitments and selection, and socialisation...explicit reward and status system and promotion criteria; stories, legends, myths, and parables about the key people and events...

This means that organisation culture can shape and be shaped by organisational actors. Indeed,

organisational culture can influence any organisational activity and practice, including

financial reporting practice. For this, Schein (2004, p.1) argues that:

…culture is both a dynamic phenomenon that surrounds us at all time, being constantly enacted and created by our interactions with others and shaped by leadership behaviour, and a set of structures, routines, rules, and norms that guide and constrain behaviour.

In line with financial reporting practice, it can be argued that as it takes place in an

organisational arena, such practice will be strongly influenced by the organisational culture of

a company. It is also influenced by interaction between employees of the company and the

outside world. Consequently, financial reporting practice is a socially constructed reality

involving actors, beliefs, norms and external pressures. Indeed, quality financial reporting

practice in Bintang is strongly influenced by its ethical culture. The following section will

discuss the social construction of financial reporting practice in Bintang.

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SOCIAL CONSTRUCTION OF FINANCIAL REPORTING PRACTICE

The work of Berger and Luckmann (1984) is useful for understanding financial

reporting practice as a socially constructed reality. They (1984) argue that the world is socially

constructed through collective efforts. For Berger and Luckmann (1984), a social reality is

constructed through a dialectical process involving three moments “externalisation”,

“objectivation”, and “internalisation”.

Within Berger and Luckmann (1984) terminology, social construction of a reality

occurs in a condition involving interaction among individuals, and between individuals and the

institutional environment. In relation to financial reporting practice, it can be argued that it is

an institutionalised practice involving interplay between individuals, organisational culture and

the external environment.

In the case of Bintang, it can be seen that most personnel in Bintang believe that

organisational culture plays an important role in shaping quality financial reporting practice.

For example, even though the President of the Board of Directors and Director of Financial

Services do not directly say that there is a relationship between culture and quality financial

reports, they claim that only those who understand Bintang are able to assess such a

relationship. The President of the Board of Directors said that

I do not really know whether the financial report is a reflection of organisational culture. For example, we could see that some insurance companies provided a high figure in revenues. But we did not know how the company got the revenues. Bintang always implements business ethics. But do other companies consider ethical aspects in their business? I do not think so, because we can see how business in Indonesia is... a legal activity is okay, illegal ones are up to you. We are committed to ethical business. Only the “market players” and those who are concerned with Bintang are able to assess whether our financial report is a reflection of our organisational culture. (My translation.)

A similar view was held by the Director of Financial Services, who stated that:

…Financial reports also reflect our culture, although it is not easy for users to directly understand the relationship between organisational culture and the reports. (My translation.)

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A convincing argument of the existence such a relationship can be seen from a

statement by new employee (Mr C), who previously worked at a famous audit firm in

Indonesia (Deloitte). He insisted that:

…Bintang got an annual report award. I think that it was reasonable. We have an ethical culture and our culture greatly influences the quality of our financial reports. (My translation.)

Bintang has a unique culture that influences employees not only in the Division of Accounting,

but also in other divisions to behave ethically when carring out their jobs. A statement by one

of the accounting staff explained how such a culture shapes behaviour of individuals. He (Mr

A) pointed out that:

I think numbers or data contained in financial statements reflect the moral values or a culture of our company, especially in the Accounting Division. I did not really know what was going on in other divisions. But, I believe they [other divisions] have implemented the same values. (My translation.)

This ethical culture has been institutionalised by both the founders and the Board of Directors,

who continuously remind individuals in Bintang of the importance of being conservative in

conducting business. Another employee in the Accounting Division (Mr D) remarked that:

I believe that the reason why we got annual report awards was that we had honest leaders. They never manipulate accounting data. That is our culture...conservative. (My translation.)

This statement is consistent with a view expressed by the Director of Administration Services,

who is also a minority shareholder and a son of a founder. He said that:

The quality of financial reports is mainly determined by ethical conduct of those who prepare the reports. If you are used to running a business ethically, you will automatically provide the correct information about the company’s activities. (My translation.)

Similarly, Mr E, who is responsible for preparing the financial reports stated that “there is no a

surprise in the annual report awards. With or without the annual report awards we are always

committed to quality financial reporting practice. Our financial reports are just like that” (My

translation.)

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The head of the Internal Audit Unit has an interesting view concerning the relationship

between organisational culture and financial reporting practice. He justified his statements as

follows:

We have no crucial changes in financial reports. The insurance industry has standardised financial statements. We always obey regulations. But it should be noted that regulations are only a guide. We have no choice except to comply with the regulations. You should know that the format of financial statements is the same as another insurance company. What makes it different is the output of financial reporting practice. Output needs process and process is greatly influenced by the corporate culture. We always attach a voluntary explanation of any items that we consider important for users to know. This is part of our commitment to transparent reporting. We always try to disclose any information as transparently as possible. (My translation.)

His subordinates also supported the statement. For example Mr B said that “Bintang has

produced transparent financial reports. It is very transparent indeed. This happens because of

our culture” (My translation.).

An example of the influence of organisational culture on financial reporting practice

can also be seen from the statement by the Director of Financial Services:

We made a significant change in the current annual report [2002]. We changed the way we calculated the unearned premium account. There is a regulation determining how to calculate this account, but we are used to calculating the account more conservatively. It is more prudent if we talk about the insurance business. The point is that we include commission as a deduction of unearned premium. I apply a conservative approach for maintaining the company’s solvency. (My translation.)

Financial reporting practice in Bintang shows that there is a strong relationship

between organisational culture and quality financial reporting. This implies that a company

with an ethical culture will more likely be committed to quality financial reporting practice

than companies with unethical cultures. This is consistent with claims of such relationships in

the accounting literature (Adams and Kuasirikun 2000; Geriesh 2003; Lewis and Unerman

1999).

Studies of fraudulent financial reporting practice also demonstrated that financial

reporting fraud is influenced by a set of ethical values reflected by dishonest management,

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personality anomalies, lies and crookedness (Loebbecke, et al. (1989), and a poor

organisational culture (Merchant 1987). A poor organisational culture, according to Merchant

(1987), is a culture typified by a lack of moral principles, guidance and leadership; as well as

no internal rules, policies and procedures. Adams (2002) remarks that culture reflects moral

values, which one would expect in turn to influence at least the issues on which companies

perceive as worthy of annual reports.

The story of Bintang provides a real and interesting portrait of a relationship between

an organisational culture and financial reporting practice. Different from financial reporting

practices of other companies, the financial reporting practice in Bintang reflects a local culture

—Javanese culture—that shapes not only individual behaviour but also its organisational

culture.

Financial Reporting Practice: a Reflection of Javanese Values

The financial reporting practice of Bintang is constructed as a rhetorical story to gain

legitimacy and maintain social harmony. The reason that the company conducts such practices

in this way is because it reflects Javanese culture. To maintain social harmony, individuals

should be members of a group and should work within the framework of gotong royong and

musyawarah. These Javanese values can also be seen in Bintang.

The organisational reality of Bintang indicates that success is a collective achievement

under the guidance of its management. In line with the concept gotong royong (cooperation),

the establishment of executive committees in Bintang can be seen as an example of

cooperation. Even though such committees are not mainly found in the Accounting Division,

several employees in the Accounting Division are also members of the committees.

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Consequently, the committees play (consciously or unconsciously) roles in constructing

financial reporting practice. For example the Director of Financial Services said that:

...the committees are actually intended to build better control. However, since the establishment of committees has been part of a trend in implementing the practice of good corporate governance, we decided to make some executive committees. On these committees we decide everything together. (My translation; emphasis added.)

Similarly, the Director of Administration Services pointed out that:

...we...establish and utilise committees for the purpose of showing that we make a collective decision. Directors do not make their own decisions. We try to develop collectivism. (My translation; emphasis added.)

This view is also consistent with that of the manager, who is responsible for underwriting

policies. He said:

The executive committee is intended to ensure that crucial decisions are not determined by a single person. The use of a team in the decision-making process will lead to a better decision. As far as I know the committees have run well and togetherness in teamwork is part of our culture. (My translation; emphasis added.)

In addition, in the 2001 annual report of Bintang, the Chairman of the Board of Commissioners

expressed his feelings in regard to the importance of helping each other (gotong royong). He

said (p. 15):

Finally, we also extend our deep appreciation to shareholders, all employees of PT. Asuransi Bintang, Tbk agents and business partners, and all financial authorities that have contributed to the success of PT. Asuransi Bintang, Tbk and we hope that this cooperation can be further extended in the forthcoming years. (My translation.)

Moreover, an example of musyawarah can be seen from a discussion held by the Audit

Committee of Bintang regarding changes in the calculation of the estimated unearned

premium. On 24 March 2003 the Audit Committee and the Board of Directors held a meeting

with an external auditor to discuss the final draft of the annual report. In this meeting they

discussed issues concerning compliance with regulations, a proposal for improving an internal

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control system, an audit report draft, and accounting policies and disclosures in the 2002

annual report.

A long discussion concerned an accounting treatment and necessary disclosure in

regard to changes in the calculation of the estimated unearned premium. The external auditor

believed that changes in the calculation of the unearned premium should be classified as a

change in estimation, rather than a change in an accounting method.

According to the Director of Financial Services, a change in the calculation that made

the estimated unearned premium was Rp. 12 billion lower than that of the previous calculation,

which was intended to fulfil the requirement of Decree of the Minister of Finance No.

481/KMK017/19991, and was not intended to increase the company profit. Such a change is

not against the law. Indeed, the President of the Board of Directors argued that such a change

is allowed by the authoritative body and said:

I personally discussed this issue [changes in the calculation of the estimated unearned premium] with the regulator [the Department of Finance] and also wrote a letter to the regulator. It is not a problem. We still use 40 per cent in the calculation. The difference is only in the basis of calculation. Previously we calculated 40 per cent of the net premium and now we calculate 40 per cent of the net premium after a deduction of a net commission. (My translation.)

Furthermore, in the meeting, one of audit committee members asked a question of the

external auditor regarding the changes. She said:

What do you think about this change? Is this an estimation change or a change in an accounting method? If this change is concerned with an accounting change, there should be disclosure of why the auditor agrees with the change. Restatement on the 2001 financial statements should also be done for the change. (My translation.)

In reply to the question the external auditor argued that:

This is an estimation change because there are only two calculation methods of the estimated unearned premium: the aggregate method and the daily basis method. The change is only concerned with the basis of calculation. We have internally discussed this change with other auditors. I believe that the change is more related to an estimation change, rather than a change in accounting method. (My translation.)

1 This decree is replaced by the Decree Number 424/KMK.06/2003, which requests insurance companies to achieve the level of solvency at 75 per cent, 100 per cent, 120 per cent by the end of 2002, 2003 and 2004 respectively.

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After discussing this change, a compromise was finally made and the Chairman of the

Audit Committee suggested that the auditor should clearly express such a change in the 2002

annual report that it is legally allowed and still complies with regulations, especially the decree

of the Minister of Finance No. 481/KMK.017/1999. As a result of the discussion, the external

auditor disclosed the changes in the notes to the 2002 financial statement (note 2h) as follows:

In 2001, the estimated unearned premium is computed based on the aggregate percentage method at the rate of 40 per cent of the net premium. Effective from 2002, the company adopts the aggregate percentage method of 40 per cent of the net premium after a deduction of a net commission. The change in the computation still meets the Decree of the Ministry of Finance No. 481/KMK.017/1999 dated 7 October 1999 and the Letter of the Insurance Director, the Directorate General of Finance Institutions, Number S4212/LK/2000 dated 23 August 2000. If the 2002 estimated unearned premium is computed based on the aggregate percentage method of the net premium without a deduction of net commission, the unearned premium will increase by Rp 12,403,893,000. The change in the estimated unearned premiums computation was made in order for the company to still comply with the ratio of investment to technical reserve and claim payable as required by the Decree of the Ministry of Finance.

This example shows how musyawarah guides individuals in Bintang to make a collective

decision. The importance of musyawarah is also supported by the Director of Financial

Services, who argued that:

...before a final draft of financial statements is signed, the external auditor reviews the draft and sometimes we have a conflict with the auditor, for example, about the use of a certain terminology of information being disclosed in annual reports. We usually overcome this conflict by making a compromise. (My translation; emphasis added.)

The above narratives illustrated how gotong royong and musyawarah influence

financial reporting practice in Bintang. Clearly, maintaining social harmony is the ultimate

purpose of publishing quality annual reports. This supports the view expressed by Maclagan

(1998, p. 141) that “...organizations are seen as adapting to a set of norms in the social

environment, and gaining legitimacy”.

Conservatism: a Lesson From Bintang

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In accounting literature, conservatism is concerned with procedures adopted by an

accountant when facing uncertainties. It is unquestionable that conservatism holds an

extremely important place in the ethos of accounting (Wolk, et al. 2001). Conservatism guides

accountants to make decisions based on logic and evidence that will lead to the fairest

presentation of financial statements. According to conservatism, when accountants are facing

uncertainty as to which accounting procedures or methods to apply, they tend to choose the

procedures that will be least likely to overstate assets or income.

However, within Bintang’s context, the word conservatism has a broader meaning than

that generally accepted in accounting literature. In Bintang, conservatism is applied not only in

financial reporting practice, but also in all aspects of organisational life. This argument is

based on the fact that for Bintang, conservatism is more than just choosing a procedure.

Rather, it conveys an ideology, values and beliefs. Consequently, Bintang views conservatism

in the same way as is commonly used in politics.

In politics, conservatism might be seen as a philosophy or ideology supporting the

importance of traditional values or established social order. Thus to quote Tannsjo (1990, p.

4):

…the conservative attitude...is characterized by two central tenets...(1) that whatever exists as a well established fact ought to continue to exist and (2) that the reason why it ought to continue to exist is that it is well established.

It should be noted that for proponents of conservatism, tradition does not merely mean customs

or habits, but consists of standards and institutions that are perceived to be a guide to promote

a well-ordered life (Jost, et al. 2003; Kirk 2001). Therefore, the orientation of a conservative

attitude is to maintain order and stability and to adhere to pre-existing social norms.

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In light of conservatism, orientation to values plays an important role in shaping the

behaviour of employees. In this regard, a conservative attitude derives values from traditions

and judges the world around the individuals to be organised by the standards they trust (Jost, et

al. 2003). In addition, they do not simply preserve traditional or established values, but ensure

that a society is socially ordered according to its values (Muller 2001; Stone 1994).

To keep tradition alive, for example, in an organisational context, conservatives pass it

down from generation to generation, from superiors to subordinates, who embody the

conservative attitude of the organisation. In other words, to maintain a conservative attitude a

leader must be able to institutionalise the attitude in an organisation’s life. The following

section describes how conservatism is embedded in financial reporting practice in Bintang.

Conservatism in Bintang: a Reflection of Javanese CultureThe concept of conservatism applied in Bintang is similar to that used in politics. Thus,

for Bintang to be conservative, its staff must be able to conduct ethical business and obey

regulations and any socially acceptable norms and values for the purpose of maintaining

stability and order in Indonesian society. Bintang has employed conservatism since the

establishment of the company. The reason for this is that Bintang was established not simply to

raise profits, but to improve the welfare of Indonesian society. This can be seen from a

statement by the charismatic founder, Mr Soedarpo Sastrosatomo in the 2004 Management

Annual Meeting of Bintang. He said:

Bintang not only raises money, but also utilises our independence so that we can fight in our own country. We have a holy spirit. The founders then have institutionalised the holy spirit in Bintang, to enable its organisational members to utilise our independence and to improve the prosperity of our society. (My translation.)

This statement implies that the improvement of social wealth is more important than profit

maximisation. Thus, conducting ethical business is the only way to achieve such an objective.

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In so doing, Bintang always obeys all regulations and operates in accordance with socially

acceptable values. This has been accepted as a tradition of Bintang in dealing with insurance

business and external pressures.

Conservative attitude in Bintang is also confirmed by Mr A in the Accounting Division,

who said:

From its establishment Bintang always complies with all regulations promulgated by authorised bodies. This is why Bintang is well known as a conservative company. This is part of our culture... (My translation.)

This statement is supported by Mr G, the manager who is responsible for underwriting

policies. He maintained that Bintang is committed to obeying regulations. He said that

“Bintang is very conservative in implementing regulations. Bintang has continuously kept

obeying any regulations” (My translation.)

Such statements indicate that in Bintang, as discussed before, the conservative attitude

has been accepted as a taken-for-granted belief that guides its employees in conducting

business. A statement by Mr B, a senior internal auditor, illustrates this view:

As far as I know, Bintang is conservative in conducting business. With or without formal rules we tend to conduct ourselves ethically...I think since the establishment of Bintang, we have run the business conservatively. The founders of this company always remind us about the importance of being honest, ethical and fair in doing business. I am proud of working here. Even though Bintang is a small company, it always runs an ethical business. (My translation.)

In addition, being conservative does not mean static. Instead, such an attitude has

driven Bintang to be responsive to external pressures. An active response to new regulations is

an example of Bintang’s flexibility, even though the Indonesian business environment has

been surrounded by unethical business and corrupt government. In this regard, it is interesting

to note what employees of Bintang said about conservatism and external pressures. For

example, Mr H believed that:

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Although Bintang is conservative, this company is very flexible in responding to changes in the business environment...Management always complies with regulations. If a new regulation is issued, Bintang usually establishes a team to discuss whether the regulation only affects the head office or influences both the head office and branch offices. Thus, we can anticipate the consequences of any regulations. (My translation.)

This statement is supported by Mr B, who contended that:

We are very flexible in responding to environmental changes...Thus, being conservative does not mean we neglect the changes in the business environment. We also adopt new concepts introduced by professional accounting bodies, as long as the concepts are consistent with our culture. (My translation.)

Another claim showing the commitment of Bintang to be conservative can be seen

from a statement by the Director of Administration Services. He said:

In line with the flexibility of Bintang to respond to environmental changes, I think Bintang employs a conservative approach. This is a positive policy because currently we have tight regulations. However, these tight regulations are not a major problem for Bintang, as the conservative approach has led Bintang to keep obeying the regulations. It is true that the tight regulations have made insurance business more difficult. But for Bintang, because of the conservative approach, to implement the tight regulations is not as difficult as for other insurance companies. Indeed, many insurance companies collapsed because of the regulations. Thus, I believe that conservatism is good for supporting the implementation of regulations...However, as Bintang is used to obeying the rules and never conducts unethical business activities, sometimes the conservative approach makes it difficult for Bintang to compete with other insurance companies. We know that we might be able to conduct business like other companies, such as illegally reducing the customer’s premiums, which result in getting costumers. But we do not want to do that... (My translation.)

Such quotations showed that “the organization and the management of work involve

moral matters and ethical dilemmas from top to bottom from beginning to end” (Watson 1998,

p. 253). The reason that organisational members of Bintang conduct ethical business can be

related to a view by Blanchard and Peale (1988, p. 7) who wrote that:

…ethical behaviour is related to self-esteem...that people who feel good about themselves have what it takes to withstand outside pressures and to do what is right rather than do what is merely expedient, popular, or lucrative... that a strong code of morality in any business is the first step toward its success...that ethical managers are winning managers.

What has been practised in Bintang also illustrates that the company has tried to judge

the business environment to be well ordered by the values that Bintang trusts, as Jost, et al.

(2003) describe. This implies that Bintang obeys regulations to ensure that there is social order

and stability of society according to its values. This view is actually a reflection of Javanese

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culture. Indeed, for Bintang, maintenance of social harmony is the most important thing in

conducting business, including financial reporting practice. To achieve this Bintang has

implemented the philosophy “sepi ing pamrih, rame ing gawe, mangayu ayuning bawana” —

be disinterested, work hard, perfect the world (Antlov 1994, p. 77).

Obedience to regulations shows that Bintang wants to avoid unnecessary conflicts and

respect those who issue the regulations. To quote Jost, et al. (2003, p.340), “conservative

ideologies—like virtually all other belief systems—are adopted in part because they satisfy

some psychological needs”. Moreover, the case of Bintang shows that:

...accounting is intimately implicated in the construction of facilitation of the contexts in which it operates. It cannot be extracted from its environment like an individual organism from its habitat...Accounting as a social institution is shaped by culture to present and explain certain phenomena concerning economic transactions. As a social institution, accounting is integrated into customs, values, norms, beliefs accepted in a society. Thus accounting cannot be isolated and analysed as practice that is free from culture. The existence of accounting is determined by culture, customs, norms, and institutions (Hopwood, et al. 1994, p. 228; original emphasis).

Based on such reasons, the case of Bintang also signifies that its organisational actors

have constructed the company as a part of a wider social community. Thus, “individuals in

both an organisation and a society should behave so at to achieve forms of self-actualisation

that leads to social harmony” (Legge 1998, p. 159).

The Financial reporting practice of Bintang shows that quality financial reporting is

determined by an ethical culture. For Bintang, it is not economic factors that drive quality

financial reporting; rather it is a reality that is socially constructed by actors in the

organisation.

CONCLUSION AND LIMITATION

The case of Bintang shows that organisational culture plays an important role in

shaping the behviour of organisational members. The organisational culture of Bintang is built

on the bases of public accountability, conservatism and transparency, and is able to shape the

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behaviour of its actors from the top to lower levels to conduct ethical and transparent business

practice. Through the adoption of Javanese culture, organisational members of Bintang have

behaved ethically so as to maintain social harmony both among organisational members, and

between organisational members and its institutional environment.

The case of Bintang also shows that quality financial reporting practice is strongly

influenced by the organisational culture of the company. It is true that regulations affect

financial reporting practice. However, compliance with regulations is determined by

organisational culture. Thus a company with an ethical culture will more likely be committed

to compliance with regulation and to quality financial reporting practice. Taken-for-granted

beliefs have shaped the behaviour of Bintang organisational members and have driven the

company to commit to ethical culture. This ethical culture has also shaped its financial

reporting practice.

To sum up, regardless of how beliefs, values and norms are institutionalised in Bintang

to shape individuals’ behaviour, and to socially construct financial reporting practice, this

study concluded that the financial reporting practice of Bintang is a socially dynamic process.

It is a socially constructed reality involving an interplay between individual, social values and

organisations. Indeed, in the case of Bintang, it can be seen that financial reporting practice

reflects the Javanese ideas on an ethical social relationship. Financial reporting practice in

Bintang shows that accounting is a social science. It is value laden.

Despite its rich and thick description of the case chosen for this study, it is worthwhile

noting a number of limitations. First, the findings of this study are constrained by a single

company with a focus on the insurance industry, and are also constrained by a relatively short

data collection period (six months), during which there were no new regulations or pressure

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during data collection that might influence the company. Possibly, a more complete and

comprehensive analysis of institutional, political, and cultural change is needed.

Second, even though this study was undertaken by prolonged engagement in the

organisational setting, and by using a triangulation approach in collecting data and interpreting

research findings, this study may have suffered from a subjective bias, especially in

interpreting data or facts. Meanings, symbols, and facts gathered and discussed in this study

were translated by the researcher without endorsement by an impartial third party. Thus, it is

possible that meanings, symbols, and facts are misinterpreted unintentionally. Nevertheless,

this should not be a crucial problem because no research approach is free from a subjective

bias, whatever research paradigm is used. In fact, interpreting and reporting research findings

is a matter of rhetoric of how the researcher uses argumentation and logic to persuade an

audience.

Thirdly, the field study was performed successfully because of the authority of the

President of the Board of Directors. Unfortunately, such authority could lead to a problem. As

other ethnographic field studies, this study might be suffered from problems of data credibility.

Even though people being interviewed had freedom to express their views and their names

were not included in this report, it is possible that they might provide information about the

company in favourable tones. This, of course, could result in subjective findings that might not

reflect the true description of phenomena being studied. However, because this study was

performed using a triangulation approach in collecting data (documentation, participant

observation and interview), misleading information could be minimised.

Finally, considering limitations of this study, further studies involving different

companies from different industries are needed. In order to examine the consistency of

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research findings, such studies should be still directed toward answering questions of whether

companies with ethical organisational cultures always commit to quality financial reporting

practice, does ethical leadership always drive a company to commit to such practice, and does

“local culture” influence financial reporting practice of a company?

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